When thinking about business corruption, I was reminded of movies in the 80s where a man dressed in an expensive suit with dark shades and a briefcase unknowingly walks up to a person with a similar briefcase and drops his down next to the person, picks up his briefcase and takes off with the contents.
That may be how business corruption took place back then, but now it has become more sophisticated. So what are the different types of business corruption?
Corruption is dishonest actions by those who are in a position of power and the penalties if found guilty can range from fines, imprisonment, and the reputation of the business being ruined. There are several types of business corruption—bribery, fraud, extortion and solicitation, embezzlement, collusion, under-the-table transactions, double-dealing, money laundering, and diverting funds.
Bribery is the most common form of corruption in business. It can happen between two private individuals or between a private individual and a public official. It can also take on many forms.
In cases such as restaurants attempting to pass inspections, it can be known as taking “grease” money. This means if the restaurant owner pays the inspector, that person will give them a passing inspection, and they will be able to obtain a permit or license to operate.
Businesses have also been known to bribe a public official in order to get them to move through what usually would be a lengthy approval process more quickly. It could be that the business needs approval for a grant, subsidies, or a contract or loan.
Types of Bribery
A kickback is an illegal remittance that is intended to be compensation for privileged treatment or any other type of inappropriate services received. The kickback does not necessarily have to be money. It could be in the form of tickets to an event, a special gift, credit, or anything of value. Both the payer and receiver of the kickback are guilty of corruption.
Gifts and Hospitality
Sometimes a business owner will shower a specific person with gifts and special favors every time they visit in hopes of gaining a favorable decision on a matter sometime in the future.
Trading of Information
Trading of information is a form of a bribe where a business employee either offers or receives a bribe as a trade-off for confidential information. The trade-off can be any number of things. But when the restricted information being traded pertains to a company’s stock, bonds, or securities, this type of corruption is known as “insider trading.”
A Real Example of Trading of Information
A California attorney, Shivbir Grewal, represented Spectrum Pharmaceuticals in 2013. While representing the company, he learned that it was on the verge of making an announcement that there was a significant decline in expected revenue because their orders had been decreasing.
Upon hearing this “privileged” information, Grewal sold his entire investment in Spectrum stock and tipped off his wife, Preetinder Grewal, who then proceeded to sell all of her shares. Together they avoided a loss of nearly $45,000 by selling based on this insider information.
The Securities and Exchange Commission discovered their criminal activity and declared that Shivbir breached the attorney-client privilege and was ordered to pay $90,000 to settle the SEC’s charges. He was then suspended from practicing as an attorney before the SEC on behalf of any publicly-traded company or entity regulated by the agency.
Influence peddling happens when a person with real or perceived power over another person trades that power for a disproportionate benefit. A person in a position of power asks for favors in exchange for utilizing their authority to promote the interests of a select third party in an unreasonable and unjust manner. An influence peddler gets or accepts a reward (typically a bribe) from a third party in order to exert influence over the decision of another party.
Also known as traffic of influence and trading in influence, influence peddling is not necessarily illegal.
A Real Example of Bribery
Fifty rich and some famous people were charged by the U.S. federal prosecutors in March 2019 for schemes involving wealthy parents across the country. The scheme, nicknamed “Operation Varsity Blues” by the federal government, involved parents who were purchasing spots at ivy league universities for their children.
Some parents were Hollywood celebrities like Felicity Huffman and Lori Loughlin. Others were business leaders like William E. McGlashan Jr. There were also top college athletic coaches who were accused of taking millions of dollars to help get undeserving students into a vast array of colleges by claiming they were top athletes.
There is something called “bounded ethicality,” which describes the systematic and predictable ways people can engage in a wrongful act and not realize they are doing anything wrong. In this instance, the parents were so focused on doing what they thought was best for their children they didn’t even think about all of the hard-working students who were displaced in the admission process because of these less qualified students taking up their spots.
Some specific examples in this scheme were:
- Parents of a teenage girl who had never played soccer paid $1.2 million to make their daughter a star player recruit.
- Another student who had not rowed before was able to secure a spot on the University of Southern California crew team after the school received a picture of another girl in a boat, and her parents paid $200,000.
- Actress Felicity Huffman paid thousands of dollars to have her daughter’s SAT scores boosted. This action got the actress 14 days in prison.
The New York Times said the mastermind behind this scheme was William Singer, the founder of Edge College & Career Network, a college preparatory business. Also known as “The Key,” it is supposed to be a nonprofit arm that helps students cheat on their standardized tests and pays bribes to coaches who would get the kids into college with fake athletic credentials.
Fraud occurs when the officers of a company misuse their office for personal gain. For example, a company executive may take public dollars, such as those collected by a nonprofit and use them for themselves in a payout or vacation. Anything that they were not explicitly entitled to.
Another way business executives commit fraud is by enriching their own salaries by taking money out of the wages of lower-level employees.
Extortion and Solicitation
Extortion is when a person uses threats to another in order to make the other person give them money, property, or something of value or any acquittance, advantage, or immunity of any description. They could threaten to commit violence, accuse the victim of a crime, or reveal private or damaging information about the victim.
The type of property the offender attempts to claim through extortion doesn’t have to be physical. It could include cash, tangible goods, liquor licenses, debts, and even an agreement to not compete against the extortioner in business. In some cases, sexual acts are also included, though some states have specific laws that govern sexual extortion.
Types of Extortion
Blackmail as a Form of Extortion
Sometimes blackmail and extortion are used reciprocally. When thinking of blackmail, one generally thinks of the criminal extorting money to keep quiet about an incident the victim does not want public. Yet with extortion, it covers a broader range of conduct.
Threats as a Form of Extortion
General extortion requires the criminal to make some kind of threat toward the victim. With blackmail, the criminal is extorting money by threatening to do something harmful to the other person, such as exposing a secret. With threat as a form of extortion, the criminal may threaten to injure the victim or someone close to them or accuse them of a crime.
With cyber extortion, criminals threaten to expose all a business’ confidential data unless the business meets its monetary demands.
A Real Example of Extortion
Giridhar C. Sekhar was convicted of extortion after threatening to expose an extramarital affair if the General Counsel for the State Comptroller did not recommend that the state pension fund invest in a fund that Sekhar’s company managed.
The New York State Comptroller is the only trustee for the Common Retirement Fund, which is an employee pension fund for state and local government employees in New York State. This person is the only person who has the authority to approve investments for the Fund.
In 2008 and 2009, the Comptroller was thinking about investing in a fund managed by FA Technology Ventures, which would have accumulated up to $7.6 million in fees for the company. At the same time, the General Counsel was advised by the office of the New York Attorney General that they were investigating an FA Technology agent who was associated with a similar fund and that the Comptroller should not invest in FA Tech III. Thus, the Comptroller decided not to invest.
Exactly four days later, the General Counsel got an email saying that the sender would expose his extramarital affair to the public if he did not change his mind and recommend to the Comptroller that he approve an investment in FA Tech III. After several more emails, the FBI was able to trace them to the home of Sekhar, who admitted to sending them. He was indicted on one count of extortion and six counts of interstate transmission of extortionate threats. He was eventually convicted on five of the six counts and sentenced to seventy-five months imprisonment.
Embezzlement is when a person takes something from the company in the form of funds or goods and uses it for personal gain. It generally happens with a person who is in charge of distributing the company’s funds. They may hide new incoming funds and then secretly use the money for themselves, or they may take small increments of money over a period of time, hoping that it doesn’t get noticed. This type of embezzlement is called “skimming.”
Sometimes an employee will take out a large sum of money and then disappear, never planning to return. Or they may underreport the amount of income generated. Generally, they do this to avoid claiming the entire amount on the business’s taxes. This is known as tax evasion.
A payment that is made and taken by two parties under the table happens when neither party is planning on reporting the income to tax authorities. They are usually trying to evade paying taxes, and it is illegal.
Collusion happens when two or more businesses that are normally competitors decide to work together in order to gain some type of advantage. An example would be when two companies agree to restrict supplies or goods they both use with the intent of driving up the prices or setting an artificially high price. It is generally found in oligopoly situations because there are relatively few competitors.
Things that could indicate that collusion is taking place are when a group of suppliers sets their prices at a uniformly high or low level. Or another sign is when suppliers get together and agree to refuse to sell in each other’s territories. This creates a regional monopoly.
A third indication that corruption is present is when a group of suppliers routinely refuse to bid in a competitive situation, thus, allowing the remaining bidder to bid at a ridiculously high price.
An example of collusion would be when several watch companies agree to put a limit on their output. This, in turn, will lower the market output and keep the prices high.
A Real Example of Business Collusion
In the 1950s, there was a price-fixing cartel headed by General Electric and Westinghouse, who sold heavy equipment. The top dogs in the equipment market met privately and arranged to fix prices on items such as turbines and switchgear.
Things went fine for a while until the Tennessee Valley Authority caught them red-handed. The TVA was reviewing its financial records and discovered that in the previous three years, 47 manufacturers had been submitting identical bids for projects.
It seems that the leaders of these companies would meet at public places such as restaurants and golf courses and pick out a winning bid and a separate set of identical losing bids for every project or order. They used a rotation system based on the phases of the moon to determine which company got the right to submit the winning bid. All in all, they defrauded taxpayers out of nearly $175 million each year.
By 1960 the government caught on to their price-fixing scheme, and around 50 executives paid hefty fines, and nine employees of GE and Westinghouse spent time in jail.
Double-dealing is a behavior where one person cheats another by pretending to do one thing while simultaneously doing the exact opposite. The person is cheating or tricking the other by hiding their real intentions.
A Real Example of Double Dealing
When California voters legalized the marketplace for marijuana, thousands of greenhouses popped up across the state. Yet as the years passed, it has been nearly impossible for businesses to turn a profit due to the underground market for marijuana.
Legally, wholesale prices for cannabis buds had plunged as much as 70% compared to last year (January 2021), and taxes were approaching 50%. Thus, one company that agreed to be interviewed by AP News created another identity – one legal, the other not. By creating an underground business, they were able to subsidize their white market with their black market.
It seems that this is not uncommon due to the financial difficulties brought on by engaging in one of the most heavily regulated businesses in America. Many cannabis growers deal both in the white market and black market selling. One seller admitted that the system is so loose that some legally operating farms move as much as 90% of their product into the illegal market.
Despite law enforcement destroying over one million illegal plants statewide, they are struggling to stop the illicit growing of cannabis. Growers are just moving their products inside to avoid detection.
Money laundering is considered a white-collar crime whereby large amounts of money obtained illegally, such as through drug trafficking or terrorist funding, appear to have come from a legitimate source.
First, the “dirty” money is obtained illegally and deposited into a financial institution through various transactions. This is the laundering process. It could be through check deposits, wire transfers, or online transfers. The amount is in $10,000 increments or less to avoid being detected by the Bank Secrecy Act, which requires banks to report cash transactions exceeding this amount.
Money Launderers will spread the money in these increments through multiple bank accounts. This process is called smurfing.
The next step is layering, whereby the launderers will move the money around farther and farther away from the origin of criminal activity, thus, lengthening the trail.
The final step involves integration, where the freshly laundered money is introduced into the financial system and often used to buy assets such as real estate, artwork, or other luxury items.
A Real Example of Money Laundering
Twenty-four doctors and owners of medical equipment companies scammed $1 billion from unsuspecting seniors in Medicare fraud. An international telemarketing network lured hundreds of thousands of elderly or disabled patients into a fraudulent scheme by convincing them they needed back, neck, and knee braces that they didn’t actually need. The scheme was known as “Operation Brace Yourself.”
The fraudsters laundered the money they stole through international shell companies and used it to purchase exotic cars, yachts, and luxury real estate in the United States and overseas. Some of the doctors could scam the patients they had only met once through phone calls or video conferences.
Diversion of assets is similar to a “skimming” scheme when a worker takes money from a cash register. It can be referred to as “easy embezzlement” because it is not necessarily apparent that the funds are missing.
Finding funds that have been diverted is hard to investigate and usually requires outside trained forensic accountants or fraud investigators. It can be pretty difficult to investigate and prove that the funds in the suspect’s personal account were actually funds intended for the business. When a person is involved in diverting assets, they can use fake names, fake business bank accounts, or they can move the money through different institutions.
An Example of Diverting Assets
A young accountant worked for an air conditioner manufacturer called Carrier Corporation in Indiana. After being employed for four months, he opened up a personal checking account, giving it the name “Carrier Real Life Services.” This was similar to the name of the company he worked for.
Over the next couple of years, this accountant worked with vendors of his employer, instructing them to make payments through checks and wire transfers payable to Carrier Services and not Carrier Corporation. He also raised the charges on the invoices and then diverted the refunds due to Carrier into his personal accounts.
This accountant was using an unauthorized account, falsely representing the company to vendors by changing the name, account number, and amounts due, and illegally gained over $1 million. He pled guilty in May 2015.
Final Thoughts – Types of Business Corruption
If left unchecked, corruption can lead to a rise in criminal activity and organized crime. However, many steps can be taken to combat corruption.
Education that reinforces best business practices must be prioritized because it teaches managers and staff to spot possible corruption. Mandatory education, such as anti-money laundering (AML) courses, can help achieve this.
It also helps to have accountability measures in place. By doing this, it perpetuates a culture that fosters high ethical behavior while, at the same time, holding those who breach the norms accountable.
The final way to decrease business corruption is by making it easy to report.
- What Are the Types of Fraud in Law?
- What Are the Different Types of Companies in Company Law?
- What Are the Types of Business Law?
- The Many Different Types of White Collar Crime: An Overview
Alexandra Christensen is a freelance writer and editor. When she is not working on an assignment, she can be found hanging around with other writers on Medium.com/@alexandra_creates where she writes mostly about raising foster and adopted kids and those with invisible disabilities.